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Adelman's Rule and the Petroleum Firm

Author

Listed:
  • Robert D. Cairns
  • Graham A. Davis

Abstract

Observing that net prices do not rise as predicted and that resource stocks are not fixed, Adelman questions Hotelling's model of an exhaustible resource. He cites a rule of thumb for valuing oil reserves which is about one-half that given by the Hotelling valuation principle. We apply an optimization model to a stylized characterization of an oil reservoir. Adelman's valuation rule is confirmed. An r-percent rule emerges as well, but it is not Hotelling's rule. We end the paper with our interpretation of Hotelling's rule. We also consider the role of investment in augmenting the quantities of a resource currently extracted.

Suggested Citation

  • Robert D. Cairns & Graham A. Davis, 2001. "Adelman's Rule and the Petroleum Firm," The Energy Journal, , vol. 22(3), pages 31-54, July.
    • Handle: RePEc:sae:enejou:v:22:y:2001:i:3:p:31-54
    DOI: 10.5547/ISSN0195-6574-EJ-Vol22-No3-2
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    References listed on IDEAS

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    1. Graham A. Davis, 1996. "Option Premiums in Mineral Asset Pricing: Are They Important?," Land Economics, University of Wisconsin Press, vol. 72(2), pages 167-186.
    2. Thompson, Andrew C., 2001. "The Hotelling Principle, backwardation of futures prices and the values of developed petroleum reserves -- the production constraint hypothesis," Resource and Energy Economics, Elsevier, vol. 23(2), pages 133-156, April.
    3. repec:aen:journl:1992v13-01-a01 is not listed on IDEAS
    4. Magliolo, J, 1986. "Capital-Market Analysis Of Reserve Recognition Accounting," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 24, pages 69-108.
    5. repec:aen:journl:1994v15-03-a01 is not listed on IDEAS
    6. repec:aen:journl:1993v14-01-a01 is not listed on IDEAS
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    Citations

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    Cited by:

    1. Hartwick, John, 2011. "Higher Quality Exhaustible Resource Deposits Receiving Higher or Lower Resource Rents in a Simple Spatial Framework," Queen's Economics Department Working Papers 274079, Queen's University - Department of Economics.
    2. Hartwick, John, 2012. "Higher Quality Exhaustible Resource Deposits Receiving Higher or Lower Resource Rents in a Simple Spatial Framework," Queen's Economics Department Working Papers 274629, Queen's University - Department of Economics.
    3. Leiva, Favio, 2026. "A two-sector model of resource depletion in Peruvian mining districts: Bayesian Model Averaging calibration and 3D phase diagram analysis," Resources Policy, Elsevier, vol. 114(C).
    4. Hartwick, John, 2012. "Higher Quality Exhaustible Resource Deposits Receiving Higher or Lower Resource Rents in a Simple Spatial Framework," Queen's Economics Department Working Papers 274631, Queen's University - Department of Economics.

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